When is record-keeping better arranged through a blockchain than through a traditional centralized intermediary? The ideal qualities of any record-keeping system are (i) correctness, (ii) decentralization, and (iii) cost efficiency. We point out a blockchain trilemma: no ledger can satisfy all three properties simultaneously. A centralized record-keeper extracts rents due to its monopoly on the ledger. Its franchise value dynamically incentivizes correct reporting. Blockchains drive down rents by allowing for free entry of record-keepers and portability of information to competing “forks.” Blockchains must, therefore, provide static incentives for correctness through computationally expensive proof-of-work algorithms and permit record-keepers to roll back history in order to undo fraudulent reports. While blockchains can keep track of ownership transfers, enforcement of possession rights is often better complemented by centralized record-keeping.
We are grateful for an insightful discussion by Gur Huberman and helpful comments from Zhiguo He, Stephen Morris, Ulrich Müller, Wolfgang Pesendorfer, and seminar participants at the NYU Five Star Conference, the SEC, the University of Chicago, the Wharton School at the University of Pennsylvania, the Princeton Department of Computer Science, the St. Louis Fed, the Princeton Department of Economics, the NYU Intermediation Conference, and the BIS. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
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To date, no single relationship (other than my salary form Princeton University) has accounted for more than 15 percent of my aggregate annual income in that year.
Significant Remunerated Activities:
Speaking engagements and lectures
ECB, NUS/Monetary Authority of Singapore, ESRB, Bundesbank (Research Council), Bank of Korea (Keynote presentation), Bank of England, National Bank of Austria, Swiss National Bank, Bank of Japan, Federal Reserve, New York Fed, Bank of Canada, Bank of Chile, Bank of Korea
Swiss Finance Institute, 2012-
No expert testimony for law suits or paid consulting work for private cooperation to date.
Sloan Foundation 2011-12
Guggenheim Fellowship, 2010-11
INQUIRE Europe, Research Grant
Significant Non-Compensated Activities:
American Finance Association: Director
Financial Advisory Roundtable and Monetary Policy Panel, Federal Reserve Bank of New York, 2006 – present
INET Advisory Board Member, 2009 – present